By: Jamie Collum and Andrew Cartwright
Special to Ontario Construction News
The ability to adapt and change on the fly was a key component of any successful strategy for a construction company in 2020. What began as a very promising year, quickly became one filled with uncertainty as job sites closed and offices shuttered with the onset of the COVID-19 pandemic. Thankfully, our industry quickly found its footing by early May as construction’s designation as an essential industry was solidified.
However, this new reality brought a significant burden as construction companies had to adapt to opening in a pandemic environment. There were the extra costs for PPE, site management challenges, supply chain delays, contractual disputes over pandemic delays, unexpected quarantines for key staff and trades and many more uncontrollable issues.
As we enter 2021, we are seeing a resurgence in cases, fresh lockdowns and additional uncertainty as plans to roll out vaccines remain murky. For banks and surety companies the impact of the first round of shut-downs is only now becoming clear as contractors provide financial reporting for the 2020 year. This has left the surety industry nervous of the potential impacts even without the news of fresh lockdowns heading into 2021.
In 2020, the surety industry had been hoping for a recovery after a few years of challenging results due to a few larger claims. However, the onset of COVID-19 has led to additional uncertainty within the industry. Appetite for new business has declined in certain pockets and sureties are becoming more stringent on receiving reporting from contractors on a timely basis. If cash flow issues and losses do start to show up in 2021 this could represent the start of a challenging year.
So how can we as an industry prepare for this potential tightening by surety companies and banks? Well it starts with understanding how surety underwriters assess risk. A surety company will traditionally rely upon the ‘Three C’s’ of underwriting when considering bond support for a construction company. Capital, Capacity and Character. Capital is arguably the area sureties focus on the most. Capital is the financial side of a contractor’s business and most commonly focuses on profitability and balance sheet strength.
One area surety companies focus on more frequently within the capital bucket is working capital. Working capital is defined as current assets minus current liabilities and is a measure of a contractor’s ability to generate short term liquidity. Generally speaking, bond companies expect to see working capital grow from year to year as excess profits are retained in the business; however, with all of the extra cost burdens this year, that may not be the case for many.
This is where the ‘Capacity’ and ‘Character’ aspects become so important as these are the intangibles that tell the true story of a construction company. Capacity is a measure of how much work (and the type of work) a company can reasonably manage at any given time. Character is a measure of moral excellence. These are the 2 C’s that all surety underwriters and brokers should be focusing on and accessing when a contractor hits a bumpy road.
So how can you as a construction company owner properly convey your capacity and character to your bonding company? This comes down to the often unspoken ‘R’ and ’T’ in surety underwriting. Relationships and Trust. Now more than ever your relationship with your surety broker and surety underwriter are vital. Ensuring that you have an open dialogue with your bonding team, discuss the corporate strategy, identify and mitigate risks and explain challenges and how you are learning and adapting will all help build comfort and allow you to maintain your bonding capacity even despite a reduction in capital. The current narrative must be about adaptability and perseverance. The financial results will follow.
Jamie Collum is the vice-president of construction for FCA Insurance. He has delivered numerous seminars and presentations on construction bonding and general industry updates in Ontario to various construction associations over the years. Andrew Cartwright is the vice-president of surety for FCA Insurance. Andrew recently joined FCA after a decade long tenure as RVP for a large national surety company.